More on Glaxosmithkline
Glaxosmithkline
Competition from generics was clearly Glaxosmithkline’s biggest problem in 2004 with big falls in the sales of a number of major drugs - the biggest declines (in absolute terms) were sales of the old formulations of anti-depressants Paxil (sales fell £752m at CER) and Wellbutrin (sales down £505m at CER). There were a number of smaller fallers which are significant taken together, examples include several antibiotics (sales down £154m CER as a group). The declines were largely offset by gains in respiratory drugs, anti-virals (largely AIDS and STD treatments) and diabetes and vaccines. Glaxosmithkline is returning to growth to growth as the worst of declines in Paxil and Wellbutrin are behind it. These drugs now generate a smaller proportion of sales so the impact of their declines will lessen. Glaxosmithkline’s sales excluding these two drugs rose 10% at CER.
Attempts to defend market share from generic compeyition with new formulations of the old drugs has met with mixed success. Paxil CR (the new, in patent, slow release formulation) remains stable but sales are growing far too slowly to replace the lost sales of the original drug - at this level it is positive for Skyepharma but will have a more limited impact on Glaxosmithkline. On the other hand Wellbutrin XL is replacing most of the declines in Wellbutrin sales.
With Glaxosmithkline returning to growth the prospective 15× PE and 3.7% yield (at the current price of 1145p) seem reasonable for a defensive and a little cheaper Astrazeneca. Astrazeneca has a short term block buster growth driver, Crestor, which Glaxo lacks, hence the premium. On the other ahnd Galxosmithkline does not suffer from Astrazeneca’s dependence on a single growth driver.
We are sceptical about the effectiveness of major pharmaceutical companies, R & D and the dependence of their pipelines has on blockbusters is also a cause for concern. This has largely become conventional wisdom over the last few years (it was quite a radical suggestion a few years ago). The counter argument is that their marketing machines will be able to make money selling small player’s innovations even if they lack their own, and of course there are potential blockbusters in their pipelines which have value, even if success is uncertain. This argument favours the greatest scale, which Glaxosmithkline has has.
While small bio-techs may be too risky for many portfolios, there are mid cap pharmas with reasonable long term risk profiles, such as Shire Pharmaceuticals and Skyepharma that are worth at least considering for investors who are not overly concerned about index weightings and who have a reasonably well diversified portfolio that can take the greater company specific risk.
Since the above was written manufacturing problems with Paxil CR and diabetes drug Adavament have forced both off the market in the US. This is likely to last some months and take approximately 2% off Glaxo’s sales and more of profits in 2005.
Random picks: Astrazeneca | BAA | Bodycote | Corus | DSG International | Hammerson | Inchcape | Liberty International | Pendragon | Viridian